TaxoptimisationstrategiesforyourLimitedCompany

inniAccountsLtd

TaxoptimisationstrategiesforyourLimitedCompany1. Preface2. Section 1: Maximising business expenses to reduce your tax

bill3. An introduction to business expenses4. Maximising your business expenses5. Claim back VAT on capital assets over £2,0006. Transfer personal assets into your company7. Claim for home office expenses using the proportionate

method8. Allowable business expenses9. Section 2: Tax optimisation

10. Introduction to tax optimisation11. Five advanced tax-saving tips12. Director’s loan account – borrowing money13. How to choose a tax-efficient salary14. Pay yourself dividends15. Appointing shareholders to maximise tax efficiencies16. Employing your partner or family members in your company17. Tax-efficient childcare18. Tax-efficient pension contributions19. Considering a relevant life policy20. Section 3: Your company’s year end checklist21. Your checklist of actions to take at the end of your

company’s financial year

PrefaceWelcome to your guide to reducing your corporate and personal taxbill from inniAccounts. We’ll share our top hints and tips from basicstrategies through to more advanced measures to optimise your taxexposure and keep more of your hard-earned income in yourpocket.

As an experienced consultant and contractor, I was pretty efficientat running my own business but it took me a while to get to gripswith maximising my tax efficiencies when I first started out. Thiswas a common theme among the team before we set upinniAccounts and it’s something we’re asked about a lot by ourcustomers.

As a contractor, consultant or small business owner you’ll belooking for ways to improve your bottom line; how to ensure moreof the money you earn stays in your business and ultimately yourpocket. Reducing your tax bill through effective expensemanagement and optimising your tax exposure can reap substantialfinancial benefits in the long term.

This ebook is the followup in our “Starting and running a successfullimited company” series and it’s designed to give you hints andideas to apply to your business; to reduce both your corporate taxexposure as well as reducing your personal tax bill. It’s aimed atexisting contractors, consultants and small business owners but it isinformative for newly formed limited company owners too.

It’s by no means an instructional manual, but we share the mostcommon strategies as well as some advanced tax optimisation tipsto help you find ways to minimise your tax bill. We’ll run througheverything from good expense management techniques through tothe more unusual ways you can ensure your tax liabilities are cutdown to size.

This guide doesn’t constitute tax advice; we strongly advise that forcomplex tax planning you speak to a qualified tax adviser. Thatsaid, there are some common sense ideas that you can applystraight away such as ensuring that you are claiming for all yourbusiness expenses and that you are maximising the opportunitiesregarding pension and childcare entitlements – so you can startsaving on your tax bill from today.

JamesPoyser

Co-founder, inniAccounts

Section1:Maximisingbusinessexpensestoreduceyourtaxbill

AnintroductiontobusinessexpensesManaging expenses is an important part of running a limitedcompany. Ensuring that you claim for all your business expenseswill increase your tax efficiency and is the first place to start whenlooking at reducing your corporate and personal tax bill.

Many freelancers, contractors and small businesses see claimingbusiness expenses as an onerous task, but it doesn’t need to be.By understanding the HMRC rules and following some simpleguidelines, you can ensure that you maximise the tax benefits andimprove your balance sheet, quickly and efficiently.

Whygoodexpensemanagementisimportanttoyourlimitedcompany

The majority of expenses incurred by your company will be taxdeductible. This means that they are deducted from your profits andtherefore reduce your tax bill. A lower tax bill means more workingcapital and you have more cash available, increasing the value ofyour company and maximising profits available for investment ordrawing as dividends.

Good expense management gives you a clear view of how yourcompany is performing and ensures that you have a true view ofyour financial position throughout the year. So many people fall intothe trap of storing up receipts and invoices to deal with later. Thismakes claiming expenses an onerous task and means that the endof year accounts and tax bill can come as a shock.

Whatisabusinessexpense?

In its simplest terms you should be looking to record any expense,paid by the business, by you, or by your employees that is forphysical items or services needed to run the business. The HMRCrule is clear on this; a business expense must be necessary andwholly and exclusively incurred as part of the day-to-day running ofyour business. On the face of it, this definition appears simple, butwhat does it mean for you?

There are two main categories of expenses, and they are treatedand recorded differently in your year-end accounts and tax returns:

Tax deductible – the most common type of expense. Tax-deductible expenses are taken from company profits so yourtax bill is reduced. These include business travel, ITequipment and services like web hosting. For a full list clickhere.

Non-tax deductible – this type of expense is not deductedfrom year-end profits and therefore does not impact on thecompany tax bill. The most common example of this expenseis client entertaining where you can still record them but itwon’t reduce your tax bill and VAT isn’t recouped.

So, if the expense is necessary and wholly incurred as part of therunning of your business, it is a business expense. Personal itemsand expenses must not form part of your expense recording;examples include clothes (non-uniform), dry cleaning andsupermarket shopping. Many businesses have exposed themselvesto scrutiny by HMRC by including personal expenses; they incurredpenalties and additional administrative burdens. If you are in anydoubt, check the HMRC website for guidance. Two questions youneed to ask are:

“DidIpurchasethisitemorservicebecauseIneeditformybusiness?” If the answer is yes, then it is a business expense.

“Istheitemorserviceusedpurelyforbusiness?” This helpsyou ascertain whether a proportion of the cost needs to bededucted for personal use. Examples of this are: mobile

phones in your own name but used for business calls too,home-office space running costs, personal vehicles used forbusiness.

Personalexpenses–thedetail

There is some confusion around personal expenses, and whilstsome items appear obvious such as your weekly shop andclothes, others can appear to be in the grey area. Commonqueries are around company cars, gym membership and privatehealthcare, for example.This sort of personal expense is seen as a benefit in kind, whichmeans that there is no reduction in Corporation Tax, you can’tclaim the VAT and you’ll need to pay Income Tax and NationalInsurance too: it just adds to your paperwork for no financialgain. We advise that you should not put personal expenses ofany kind through your company.

Classesofbusinessexpense

The best way to identify your business expenses is to think aboutwhat your business uses:

Products: physical items like stationery, work wear, furniture,IT equipment, printer supplies, tools.

Services: IT support, web hosting, accountant and legal fees,outsourced office functions, insurance.

Utilities: power, water, rates, rent, telephony.

Professional subscriptions: membership and subscription toHMRC-approved bodies.

Client entertaining: whilst you can’t reduce your tax bill orclaim the VAT back, it is a valid business expense for manycompanies.

Some expenses are simple to process as they are wholly used bythe business. Others will require careful calculation because theyconstitute a benefit in kind (e.g. where a company vehicle is alsoused as a personal vehicle) or the service/utility is used by the widerhousehold (e.g. your office is a space in your home). In these casesyou should refer to the HMRC guidelines on how to calculate whatproportion constitutes the business expense.

Claimforbusinessstart-upcostsincurredbeforeyouformedyourLimitedCompany

Yes, business set up costs can be claimed as business expenses.Any expenses that are paid for using personal funds should bedocumented and claimed for when the company starts trading. Youdo need to remember a few rules when claiming this type ofexpense:

Does it meet the business expense criteria above?

For Corporation Tax purposes the expense must be no morethan 7 years and for VAT purposes no more than 6 monthsbefore you started trading. In reality, it would be best toconcentrate on the expenses incurred 6 months or less priorto the start of trading.

ClaimVATbackonexpenses

You can claim VAT back on certain types of expenses. You’ll needto enter the VAT rate charged when entering the business expense.This is usually noted on the receipt, but if not, the main rates arebelow:

Standard (20%): the VAT rate charged on most expenses.

Exempt: bank charges, postage, insurance and interest.

Zero: train tickets, flights, books, newspapers, food (excepthot prepared food to eat in or takeaway which is standard

rated).

Remember: VAT can’t be claimed back on business entertainingexpenses.

If you use the VAT Flat Rate Scheme, VAT is not reclaimed onindividual expenses; it’s calculated using the flat rate percentage foryour business type and recording individual expenses won’tinfluence your VAT calculations and return directly. If you use theFlat Rate Scheme, only VAT on purchases in excess of £2,000 canbe claimed.

Nextsteps

Effective expense management is a powerful tool in reducing yourtax liabilities; the following chapter highlights the most commonexpense types and how to record them to reduce your tax bill.

Quicklinks

HMRC expenses guidance: a guide to your businessexpenses

HMRC list of recognised professional bodies

MaximisingyourbusinessexpensesEffective expense management enables you to maximise your taxefficiencies and it needn’t be complicated or time consuming.

This chapter will arm you with all the information you need toidentify all the business expenses you should be claiming for andhow to keep the relevant records.

Whyyoushouldclaimforallallowablebusinessexpenses

It can seem counterintuitive that claiming your business expenseswill improve the financial health of your company as they eat intoyour company profits; but business expenses are deducted pre-taxand VAT, so in real terms you’ll have more cash in your businessand your pocket. It’s not just your financial health you areimproving; business expenses form part of your evidencesupporting your IR35 exemption status. Independent businesses bytheir very nature incur expenses and running costs. Marketingcosts, professional fees and asset accumulation are all strongindicators that you are operating as a separate entity from yourclients. For more information visit our guide to IR35.

Claimingexpenses

It is important that you maintain auditable proof of your businessexpenses. That means that you need to ensure:

You log all the information about the expense including dateof the expense, total cost, VAT paid, type of expense,narrative where appropriate.

How the expense was paid for – if the expense was paid fordirectly by the company this is the most efficient way ofdealing with expenses. If the expense was paid forpersonally, this needs to be tracked to enable you toreimburse yourself either through your payslip or directly.

Categorising the expense is important as this drives theamount of tax and VAT that is deductible as well as ensuringyou apply the correct amount of VAT to the expense shouldyou go on to charge it to the client.

Receipts and other items of proof need to be retained for atleast 6 years. This is how long HMRC asks for records to bekept. It is wise to keep both hard copies and electroniccopies for ease of retrieval.

Goodexpensemanagement

Don’t let receipts and notes on expenses pile up. Deal with themdaily or at least weekly. That way the information is fresh and youare less likely to lose the receipt. By tracking your expenses as theyare incurred it will take you less time to reconcile your outgoingsagainst your bank statements each month and you’ll have a truepicture of how much available cash you have in your business.

Businessexpenses–thespecifics

Equipment

Any equipment you purchase for the sole use of the business is fullytax deductible. It is worth noting that shared use of the equipment,e.g. using your laptop as the family computer at weekends, means itis not a deductible expense. Business equipment should bereserved for the sole use of the business. The majority of theequipment you purchase will be classed as an asset and needs tobe entered onto your asset register as well as tracking the expenseincurred.

Examples

LaptopPhoneOffice furnitureStorage devicesTrademarks and patentsProperty (premises)

Whentorecordequipmentasanasset

In general terms, an asset is an item purchased for prolonged usedby the company – for example a new laptop, printer or office chairwould typically be classed as an asset. It’s important that youclassify your expenses and assets correctly – there are two simplequestions to ask yourself when making a purchase:

Will the item have a useful life of more than one year?And, does the item cost more than £200?

If so it’s likely that the purchase is an asset, not an expense.Conversely, if not, it is likely the purchase is an expense.

By entering your purchase on the company asset register youeffectively retain the real-time value of the asset within yourbusiness so it improves the value of your business. The value ofyour asset should be reduced (depreciated) over time – for example,by 25% each year, so after four years the value of the asset in theaccounts will be zero.

Consumables

Consumables differ from equipment as they are not durable items.They are by their definition consumed by the company. They aretypically purchased by the company for sole business use.

Examples

Printing supplies – paper, ink/tonerSmall office items under £200

Stationery – letterheads, business cardsPens and other desktop equipmentPostage – stamps, envelopes, packaging

These expenses are relatively simple to record as they are a basicexpense of the business. The cost is allocated to the business atthe point of purchase and there is no long-term benefit to thebusiness.

ProfessionalFees

Your business needs support from other professionals such asaccountants, solicitors and tax consultants.

Marketingexpenses

Marketing your business is important and marketing expenses areone of the core expense areas that HMRC looks at in ascertainingwhether you are working outside IR35. Ongoing marketing costsshow you are actively investing in and promoting your business.

Examples

Website build and developmentWebsite hosting feesAdvertising fees – adverts, directory submissionsPromotional material – brochures, branded items and flyers

Utilities

While certain utilities will be solely business use (e.g. mobile phonecontracts) others may have shared use if you work at home. It isimportant to only claim for the proportion used by the business.We’ll cover how to claim for home office expenses in the followingchapters. You need to be able to show evidence to support yourcalculations should HMRC question the amount you are claiming.

Examples

Landline telephone cost

Mobile phone packageBroadband feesHeating and lightingCleaning

Personaldevelopment,subscriptionsandmembershipstoprofessionalbodies

As a part of your continued professional competence, HMRCrecognises certain professional bodies and personal developmenttools such as business publications as a necessary businessexpense. It is important to ensure that the professional bodysubscription/membership fee is allowable by HMRC; check that theprofessional body is recognised by visiting HMRC’s recognisedbodies list.

It is important to note that lifetime membership fees are not anallowable expense.

Examples

Membership fees to recognised bodiesSubscriptions to business publications and websitesTraining courses essential to your businessBusiness textbooks

Businessinsurance

All insurance policies designed to protect your business interestsare classed as a business expense. We’ve listed the most commonbusiness insurance categories below, but you’ll find more completelist of insurances in the chapter “Considering a relevant life policy”:

Examples

Professional IndemnityBusiness ContentsDirectors and Officers Liability

Travelexpenses

Travel expenses fall into two categories. The more straightforward ispublic transport – you simply claim for your fare and retain thereceipt. Mileage involves a little more information gathering as yourclaim is based on the number of miles you travel rather than a flatcost.

For any travel expense you need to be aware of the 2 year or 24month rule regarding travel expenses.

2yearrule

The 24 month or 2 year rule is set by HMRC. Travel andsubsistence expenses can be claimed whilst working at a‘temporary’ workplace such as a client’s site. After this theworkplace is classed as permanent and travel expenses can nolonger be claimed.

Note: The rule also states that as soon as you are aware that fora temporary contract you will be at a workplace for more than 2years you must stop claiming travel-related expenses straightaway. For example, if you start with a 12 month contract and yousecure another 12 month contract with that client, you must stopclaiming expenses at 12 months.

Mileage

If you’re travelling to and from a temporary place of work (forexample, to a client’s office) using your personal vehicle you canclaim for the mileage. HMRC publish a fixed rate for mileage whichyou can claim without having to pay tax – for a car this is 45p permile for the first 10,000 miles per year, and 25p per mile after this.The mileage allowance is designed to cover the car’s running costsand the fuel costs: you cannot claim for the fuel, road tax or othermotor expenses as well as mileage.

Mileage claims soon add up so claiming for all work-relatedjourneys can make a real difference to your tax liabilities.

Example

If you make a 20-mile round trip to a client’s site 3 times per weekyou’d clock up 2,880 miles per year – that’s £1,296 towards therunning costs of your car, tax free.

What’s more, you can claim mileage for using your bike. Cycling toand from a client’s premises can soon add up too.

The HMRC Mileage Approved Payments (MAPS) are:

Vehicle First10,000miles/yr Additionalmiles

Cars and vans 45p 25p

Motorcycles 24p 24p

Bicycles 20p 20p

When using these rates there will be no additional tax to pay – in theexample above an extra £108.00 per month (£1,296/12) would beon the payslip with no extra tax or National Insurance deductions.

Entertainment

Business entertainment is a necessary expense for manybusinesses, but it is important to understand the different types ofentertainment and how it impacts on your tax bill.

Cliententertainment

As mentioned earlier, client entertaining is a valid business expense.It is important to note that entertainment expenses do not reduceyour Corporation Tax bill and you can’t reclaim the VAT back either.

Annualrewardevents

HMRC allows you to reward your employees and their partners withannual events, such as Christmas parties or summer barbecues.You’re allowed to claim up to £150 per person (including VAT),which can include food and drink; and even transport and hotelstays. What you need to know:

The event must be an annual event and open to allemployees.The £150 applies per person, and you can even claim forpartners who don’t work for your company – so that’s £300per couple.You can only claim for a maximum of £150 per person, if youclaim just 1p over this the whole amount becomes taxable.It’s not an allowance – you cannot just claim the amount as-is, you must claim for an actual meal or event and providereceipts.It’s not just for Christmas parties – the allowance applies toany annual event. You could even have a Christmas partyand a summer event too – as long as the combined total is£150 per head, or less.Even if you’re a one-person limited company you can stillclaim back the cost of annual company events – so why nottreat you and your partner to a festive soiree or a summergetaway?

Full details about annual parties can be found in the HMRCEmployment Manual EIM21690.

Nextsteps

Think of your business expense receipts as cash as well as avoucher to reduce your tax bill – they need to be held securely andrecorded appropriately. By taking a few minutes each day to recordyour expenses accurately you are enhancing your businessfinances. You’ll know exactly how much cash is available in yourbusiness and minimise your tax liabilities all in one go.

Audit all your outgoing expenses and ensure you arerecording all of the allowable business expenses against yourbusiness.Ensure that the business expenses are wholly attributable tothe business where possible and that any proportionalexpenses are realistic – err on the side of caution.

Keep your records up to date and your auditable proof safe –track your expenses as you go and store the receipts in atleast two places.

There is a complete list of business expenses in the chapter“Allowable business expenses”. The following chapter covers howto claim back the VAT on capital assets over £2,000.

ClaimbackVAToncapitalassetsover£2,000The majority of contractors, consultants and service-based smallbusinesses use the flat rate VAT scheme as it is the simplest andmost efficient way of accounting for VAT. If you use the Flat RateScheme, you can’t normally claim back the VAT you spend oncapital assets you buy for your business, this is already taken intoaccount in the flat rate percentage for your type of business.However, you may be able to claim back the VAT on certain assetpurchases with a VAT-inclusive price of £2,000 or more.

HMRCrulesforclaimingbackVAT

HMRC has clear rules governing reclaiming VAT for large assetpurchases.

It must be a single purchase of capital goods with a VAT-inclusive price of £2,000 or more. That doesn’t mean you arerestricted to claiming back the VAT on a single item – forexample, you could buy a pizza oven, fridge and dishwasher,as long as you buy them at the same time from the samesupplier and the price is more than £2,000 including VAT.It must be a purchase of capital goods, not services. Capitalgoods are goods you can use in the business but are notused up by it – for example, a van, computer or bottlingmachine are capital goods, but not the fuel, printer ink orbottles that go in them. A van leased or hired to you is acontinuous supply of services, but one bought on hirepurchase is considered a supply of capital goods.Software is not classed as an asset for VAT purposes as it isconsidered a service, not a good. Software cannot therefore

be included within the VAT inclusive price of £2,000 forcapital assets.You can’t claim back VAT on goods that you intend to eitherresell, or incorporate into other goods to supply on tosomeone else.You can’t claim back VAT on goods that you will let, lease orhire out – for example, a bouncy castle.You can’t claim back VAT on goods that you intend to use up(consume) within a year.Building materials and work are not capital goods. You can’tclaim back the VAT if you have building work done (even if itincludes expenditure on materials), and you can’t claim backthe VAT if you buy building materials yourself for someoneelse to build with.As long as all the other conditions are met, you can claimback all the VAT even if the goods will have some private use.For example, if you buy a van but employees are allowed freeuse at weekends to move private belongings, you can stillclaim back all the VAT.There is an upper limit on claims for certain items. If you buysomething that falls within the Capital Goods Scheme youmust write and tell HMRC and leave the Flat Rate Schemeimmediately. Goods that fall within the Capital GoodsScheme are computers or items of computer equipment witha VAT-exclusive price of £50,000 or more, or land andbuildings, civil engineering works and refurbishments with aVAT-exclusive value of £250,000 or more.

Nextsteps

Ensure that the capital assets you want to reclaim the VAT on fit thecriteria above. It is important to ensure that the VAT reclaimed onyour asset purchase is reflected in your VAT return for that period.This covers the majority of large purchases you’ll make as a part ofincreasing the assets of your company. The next chapter covers thetransfer of personal assets to your company.

TransferpersonalassetsintoyourcompanyWhen you start your business you may have some existing personalassets that you’d like to transfer into your company. This is a greatway of keeping the start-up costs low as you aren’t buying brandnew equipment. The main benefit is that the cost of the transfer(what your company pays you for the equipment) is a businessexpense and therefore has a positive impact on your tax liabilities.

Transferring personal assets to your company is straightforward, aslong as you take a pragmatic view of the value of the assets.

If you have an asset that was originally purchased for personal useyou’ll need to establish the current market value of the asset. Youcannot claim the full cost of the asset, unless it was purchasedsolely for use by your new business. A straightforward method toestablish the value of a used asset is to research the second handmarket – eBay is a simple way to do this.

Once you have determined the value of the asset, you need toprepare an invoice from yourself to your company listing the itemsand cost of each separately. A simple invoice created using a wordprocessor or spreadsheet will suffice; you just need to show on theinvoice your name, address, invoice to (your company), invoicedate, the items and their costs. If you have the original purchasereceipts for the item, it is useful to attach them for your companyrecords.

Nextsteps

As the cost of personal assets transferred is a business expense, itimpacts positively on your tax liabilities. Transferring personalassets not only reduces the cost of starting your business, it

enables you to reduce your tax bill.

In order to comply with HMRC guidance, you need to ensure thatthe value is reasonable and that you record the transactionadequately. The next chapter delves further into using personalassets for business use; namely how to claim home officeexpenses.

ClaimforhomeofficeexpensesusingtheproportionatemethodClaiming home working expenses is a bit of a grey area and onethat fewer business owners choose to take advantage of, perhapsbecause HMRC allow a flat rate claim of only £4 per week forincidental home expenses.

But if you spend even a moderate proportion of your time workingat home it is possible to claim more for home expenses – and youdon’t need to operate a full-blown home office to do so. In thischapter we cover how to generate the maximum tax saving fromyour home working and, more importantly, how you can apportionthe correct level of expenses to your business.

Defining‘workingfromhome’

It doesn’t matter how little or how much you work from home; youcan still claim home expenses providing that they are proportionateto the business usage of the space.

Whether you:

Use the home PC to tidy up a few loose ends or organiseyour expense claims for the week;Work from home on a regular basis and you clear somededicated space in one room to use as a work space whenyou need it e.g. the space doubles up as a functionalpersonal space in the house; orRegularly (or always) work from home in a more clearlydefined ‘office’. Whether this is a converted garage, a freestanding garden studio or a spare bedroom doesn’t matter;

the important definition is that the room is primarily used as awork space;

it is possible to save money by claiming for home workingexpenses, as long as you follow the rules. In order to do this youneed to figure out exactly what you can claim, and how youmeasure it.

Understandwhatyoucanclaim

If you use part of your home for business, you can deduct expensessuch as mortgage interest, insurance and utilities. However, you canonly deduct a figure that relates to business usage, which must beclearly separated from private usage. Home expenses broadly fallinto two categories: fixed costs and running costs.

Fixedcosts relate to the whole house and have to be paideven if there is no business use. These include costs such asCouncil Tax, mortgage interest or rent and insurance. If partof the home is set aside solely for business use for a specificperiod then a part of these costs is allowable; these will needto be apportioned by area and time (see the following sectionfor details).

Runningcosts relate to expenses where the bill may varywith the amount of business use. They include telephone linerental, broadband, cleaning, heat and light. HMRC officersare now instructed to “accept a claim based on anyreasonable basis” provided that apportionment is based onusage.

Measureyourusage

When allocating a proportion of fixed and running costs to yourbusiness there are three variables that need to be accounted for.

Area: what proportion in terms of area of the home is used forbusiness purposes?

Expense: how much is consumed? This is appropriate wherethere is a metered or measurable supply such as electricity,gas or water.Time: how long is it used for business purposes, ascompared to any other use?

Calculatingarea

There are two ways to calculate this element – the easiest one iswhen the rooms in your house are all a similar size. If there are 5rooms, one of which you use for business, then one fifth of the areais used for business. When calculating the total number of rooms inyour house you should exclude bathrooms.

For a more accurate calculation, you can use the total floor area ofyour house and calculate the proportion utilised by the room youuse for work. This is a fairly easy task if you have the houseparticulars from when you purchased the property, but more timeconsuming if you need to measure each room. Nonetheless, it is themost accurate and therefore the best method to adopt if the spaceyou use to work in is larger than other rooms in your house.

Definingtotalusage

The total cost for the utilities/services and fixed costs are requiredto enable you to apportion business usage from the total expense.

Time

You don’t work 24/7 and it is important to ensure that you calculatethe time you spend working within the defined home-workingspace. Note the hours you spend working at home to feed into theoverall usage calculation. HMRC says “… it is possible to apportionthe use and cost of a room on a time basis, and to allow theexpense of the room during the hours in which it is used exclusivelyfor business purposes, in the same way as it is possible to calculatethe business expenses of a car which is sometimes used forbusiness purposes exclusively and sometimes used for pleasure.”

Theproportionateexpensecalculation

This calculation can be utilised for every expense related to workingfrom home. This will enable you to work out how much to claim inbusiness expenses.

Totalusage(thetotalexpense)xarea%xtime%=ProportionateBusinessExpense

Example

Jane works from home 3 days a week for 10 hours each day inher study which has an area equivalent to 15% of his house area.Her mortgage interest is £1,000 per month.

Time: (10 x 3)/(7 x 24) = 30/168 = 18%Area: 15%So she uses 15% of her house for 18% of the timeTotal usage: £1,000

ProportionateBusinessExpense = 1,000 x 18% x 15% = £27per month.

This may not seem a lot, but when you combine all the relevantfixed and running costs together, it can amount to a substantialsum.

Here are some typical expenses to consider:

Expense Measurement Notes

Electricity &Gas

By room,square metre,or on themetre

For example, if your house hasfive rooms of approximately equalsize and one of them is used as ahome office, then 20% (one fifth)of the electricity bill can beclaimed for business usage for thedays/hours worked.

Telephone Bypercentage

The claim for line rental should bebased on the ratio of business useto total use and the overall claimshould reflect all aspects of use,including incoming calls.

Rent By room orsquare metre

Rent can include council tax,insurance, mortgage interest andeven cleaning bills, and should beclaimed according to the amountof space you use solely forbusiness (as with electricity andgas).

Repairs andRenovations

By ‘purpose’ If you have business equipmentyou keep at home, for instance aPC, you can claim for repairs. Youcan also claim for renovationsONLY on rooms that are used forbusiness purposes. For example,if you have the dining room andthe study/office redecorated butyou do not use the dining room forbusiness you cannot claim the fullredecorating costs.

Fixtures andFittings

By ‘purpose’ Any claims in this category mustbe restricted solely to businessitems: for instance, if you needsome shelving for businesspublications, the cost can beclaimed.

Broadband Bypercentage

As with the phone line, the claimshould be based on the ratio ofbusiness use versus personal use,but relating specifically tobroadband time.

Nextsteps

1. Identify any expenses that relate to working from home.2. Calculate the proportion using the formula above.3. Claim for the expenses from your company as you would any

other business expense.4. Ensure that you retain both the bills PLUS the calculations

you use to allocate the proportion to your company – this isimportant should HMRC require to see your calculations.

5. Review the business usage regularly to ensure yourcalculations are accurate – date the relevant calculationseach period.

Home usage forms part of legitimate business expenses and thefinal chapter in this section of our tax optimisation ebook is acomplete list of business expenses. In the second section we’ll lookat more complex tax optimisation techniques.

AllowablebusinessexpensesAs a wrap up to the first section of our tax optimisation guide, we’vecompiled a complete list of the most common business expenses.

Accountantfees

Accommodation

Assuming that you are not caught by the 24 month rule, you canclaim for the cost of hotels and B&Bs near to the place of workprovided you have another principal residence.

The claim is allowable for contractors and freelancers that, say, livein one city and need to be in another to work. If you have come tothe UK from overseas to work then claiming such expenses areunlikely to be allowable as that residence is likely to be classed asyour normal residence.

Should rented accommodation be more economic and practical, itcan be treated as an allowable expense provided the costs arereasonable. Should HMRC view the costs as excessive then theyare likely to take the view that the accommodation is of personalbenefit and are likely to challenge the claim. When signing up for arental agreement or lease, it should be in the company name andpaid for directly by your company.

It is important to remember that there must be no personal benefitto any claim such as providing residence for family members, i.e. itmust be necessary, wholly and exclusively for the purpose of thebusiness.

Advertising&marketing

Annualhealthchecke.g.BUPA

Annualreturnfee(CompaniesHouse)

Assets

An asset is something of value that is owned by your business suchas computer equipment or machinery. An asset is often describedas something that has value and that is able to add value to yourbusiness, for example a video camera owned by a media company.The camera in its own right is owned by the business and has value,plus it is used in the day-to-day activities of the business to addvalue.

Bankcharges

Bicycles

The way expenses are claimed is dependent on who owns the bike.If the bike is owned privately, 20p per mile can be claimed forbusiness mileage.

Alternatively the Cycle to Work Scheme allows employers topurchase bikes and safety equipment and provide them toemployees. The scheme must be open to all employees and thebicycle must be used for business purposes more than 50% of thetime. The equipment is tax deductible for the business and is loanedto the employee with no benefits in kind (P11D) liability for theemployee.

Note that the 20p per mile tax free mileage allowance for businesstravel cannot be claimed if the bicycle is owned and loaned to anemployee by your company. There is no limit on the cost of theequipment including the bicycle; however, if the value of theequipment exceeds £1,000 a consumer credit license is requiredfrom the Office of Fair Trading.

Full details of the scheme can be found here.

Bicycles–mileagepayments(ownbike)

If a privately owned bicycle is used for business-related travel, theemployee may claim 20p per mile under the HMRC approvedmileage scheme. Keep a record of your bike journeys in your

mileage log. Note that the 20p per mile tax free mileage allowancefor business travel cannot be claimed if the bicycle is owned andloaned to an employee by your company (Cycle to Work Scheme).

Bicycles–protectiveequipment

If you use the Cycle to Work scheme, protective equipment can beclaimed and items include: helmets, reflective clothing, reflectors,lights, mirrors, bells/horns, mudguards (to ensure visibility is notimpaired), cycle clips, panniers/luggage carriers to allow luggage tobe transported safely, locks and chains to ensure security, pumps,puncture repair kits, cycle tool kits and tyre sealant to allow forminor repairs.

Books&magazines

Provided the purchase is necessary to conduct the activities of thebusiness, the item can be claimed. To give an example, if atechnical manual is purchased specifically related to work beingconducted, it can be claimed.

If, however, a book or magazine is of benefit personally or is to aidin the development of a new skill, the item will not be taxdeductible. In such cases if it is paid for by your company andenjoyed by you personally it will need to be captured on a P11D forthe benefit in kind and result in additional tax and NI liabilities. Inthese circumstances it is probably best to pay for the itempersonally.

Broadband

If the broadband contract is in the company name and thereforeinvoiced to and paid for by your company, then the full cost can beclaimed even if there is a small amount of personal use. If thebroadband is billed personally and the contract is not in yourcompany name, then only the portion of business use can beclaimed. This must be worked out and evidence provided ifrequested by HMRC.

Carhire

Carparking

Car parking can be claimed for qualifying business journeys thatform part of business activities, i.e. site or client visits, and journeysrelated to attendance at a temporary workplace. Generally if thereceipt has a VAT number then VAT at the standard rate is included,or if the parking is on-street then normally it is VAT exempt.

Christmas/annualevents

See the chapter “Maximising your business expenses”.

Cliententertainment

Typically entertainment of a prospective or existing client is not atax deductible expense and although it can be paid for by yourcompany, no Corporation Tax relief will be given. In reality the truebenefit of client entertainment isn’t from the tax deductions but fromthe gesture and what it can do for your business in the future.

Clothing

Uniform and protective - You can claim the cost of either of thefollowing: necessary protective clothing to conduct duties such assafety footwear or glasses and/or work uniform worn whilst carryingout your duties, for example, a coat that carries a distinctivepermanent logo of your company.

Companystart-upfees

Computerhardwareandsoftware

Congestioncharge

Coursefees

Provided the training is work-related to upgrade a current skill, andnot to develop a new one, the cost of the training can be claimedalong with the associated costs, such as books or additional travel

costs incurred. Should the training be overseas then details may bescrutinised in more detail by HMRC.

It is recommended that full details of the training be retainedincluding receipts for the course, the course itinerary, evidence ofattendance, accommodation expenses that cover the period of thetraining etc. – essentially everything needed to demonstrate thatthere was no personal benefit.

Creditanddebitcardcharges

Director’sloanaccount

See the chapter “Director’s loan account - borrowing money”.

Donationstocharity

Equipmentrepairs

Extendedworkinghours

If you work extended hours e.g. you are contracted for 8 hours perday and you work for 12 hours, it would not be unreasonable toclaim the cost of an evening meal. However, if you are contracted towork 12 hours per day the cost of meals would not be allowable.

Eyetests

Flights(exceptfirstclass)

Fuel

Gifts

Gifts to customers are not a tax deductible expense unless they arepromotional gifts worth less than £50 and carrying a conspicuousadvertisement for your business. This could include a bottle of winethat carries your logo and an advert on it.

Glasses

In most instances glasses and contact lenses cannot be claimed as

a business expense. Even if you require glasses to use a computerto fulfil your company activities, chances are that you probably usethem outside of the work environment too, e.g. for reading,therefore they cannot be claimed for.

If, however, a prescription is required for glasses that are solely touse a computer for business purposes and they are not usedelsewhere, then this is allowable provided you have evidence tosupport it. Other examples would be welding or safety glasses.

Hirepurchase(incompanyname)

Homeoffice

See chapter “Claim for home office expenses using theproportionate method”.

Incidentalovernightexpenses

Assuming you are not caught by the 24-month rule and you stayaway from your main residence for the purpose of business, youcan claim up to £5 per night when staying in the UK or £10 per nightif overseas to cover incidental expenses such as newspapers,laundry, phone calls etc.

These claims do not need to be receipted, however it is not anallowance; therefore you cannot just claim £5/£10 in full and youmust only claim the actual amount of the incidentals incurred. Theclaim for incidentals is over and above the costs of subsistencesuch as evening meals.

Insurances

Insurances required by your company to conduct its duties such asProfessional Indemnity, Employers’ Liability and Public Liability canbe claimed for. Health insurance policies are not a businessexpenses and are therefore not tax deductible.

Interestonbusinessloans

Keypersonlifeinsurance

Latenighttransporthome(after9pm)

Lodging

Medicalexpenses(overseasonly)

Mileageexpenseswhenusingpersonalvehicle

Mileage claims can be made for business-related travel only. Oftenthe easiest way to claim for travel costs is to use a personal vehicleand claim for the mileage at the HMRC approved rates.

The advantage of using mileage rates is that they are based not juston the cost of fuel, but also costs such as insurance, road tax andmaintenance, therefore it saves you having to keep details of youractual motoring expenses.

Mileage rates are used to work out the amount that can be paid freeof tax under the AMAPs legislation.

The current rates for use of a personal vehicle are:

Vehicle First10,000miles 10,000+miles

Car 45p 25p

Motorbike 24p

Bicycle 20p

As with all expenses, HMRC expects you to be able to provideevidence to support mileage claims, e.g. a mileage log. If you do notmaintain a log and cannot provide it to HMRC if requested, thenIncome Tax and National Insurance will be due on the mileagepayments.

Mobileandsmartphones

The simplest way to claim for a mobile or smart phone is topurchase it through your company and have the contract in yourcompany’s name. This way, even if there is a small amount ofpersonal use, the purchase and contract costs can be claimed. If

the contract is in an individual’s name and not the company’s, thenonly the calls made related to the business may be claimed.

If this is the case then an itemised bill will allow such calls to beidentified. If the contract has inclusive minutes and only theinclusive minutes are used in a billing period including businesscalls, then no claim can be made. HMRC are likely to take the viewthat no additional expenses in making business calls have beenincurred and therefore a claim is not allowable.

Movinghouse

The HMRC criteria that should be used to determine if relocationcosts are allowable are:

Firstly the reason for relocation must be one of the following: you oran employee started a new job; a change in employment duties; ora change in the place where employment duties are normallycarried out.

Secondly the expenses and benefits must fall into one of the sixcategories: the employee’s sale of their old residence; theirpurchase of a new residence; transporting the employee’sbelongings to the new residence; associated travel and subsistencecosts; domestic goods for the new premises; bridging loans.

Thirdly, there is a time limit: To qualify, the expenses must beincurred or the benefits must be provided before the end of the taxyear after the one in which your circumstances changed (as outlinedin the first step of this list).

Fourthly, the distance: the new residence must be within reasonabledaily travelling distance of your new normal place of work, and yourold residence must not be within reasonable daily travelling distanceof the new normal place of work. Costs up to £8,000 are nottaxable; any payments made in excess of this must be reported ona form P11D as a benefit in kind.

Officerental

Parking

Pensionpayments

See the chapter “Tax-efficient pension contributions”.

Postage

Professionalfees&subscriptions

If you are a member of an HMRC-approved professionalorganisation related to your business activities, then the fees can beclaimed. You may get tax relief on professional fees andsubscriptions if you are registered as a member of the organisationbecause it’s necessary to your work and, HMRC has approved theorganisation. HMRC approved organisations can be found here.

You cannot claim fees and subscriptions paid to an organisationthat HMRC hasn’t approved or if the subscription is a lifemembership.

Software(installedandonline/subscription)

Sponsorship

Stationery

Subsistence

Provided the requirements of the 24 month rule are met, you canclaim for travel and the related costs i.e. accommodation andsubsistence. Whilst working at a temporary workplace you canclaim for lunch but always ensure that the cost is reasonable andreceipts are retained.

If you are staying away from home then the cost of accommodation,breakfast, lunch and evening meals can be claimed provided thecosts are not excessive. If you do stay away from your mainresidence, then you can also claim for incidental overnightexpenses.

Meals do not have to be purchased from a restaurant therefore apre-packed sandwich from a supermarket would be an acceptablealternative. You cannot claim for ingredients to make a meal

yourself.

Taxifares

Travel

Travelcards

If you purchase travel cards through your company instead ofindividual tickets; if you also use the card for personal travel thenthe personal benefit from your company may result in additional tax/ National Insurance being due. If, however, the cost of the businesstravel had it been paid for by purchasing individual tickets, exceedsthe value of the travel card purchase, then the travel card can beused for personal travel and no additional tax / National Insurancewill be due.

Disclaimer

The guidance on what are allowable expenses is complex andneeds to be considered based on individual circumstances. Noresponsibility can be accepted for the tax status of any expenseclaims made. The information provided in this chapter is for generalinformation only and specialist advice should be sought prior tosubmitting business expenses for tax relief.

Nextsteps

More information can be found in the guidance on the HMRCwebsite. This chapter concludes the section on business expenses.The second section of this ebook looks at further tax optimisationstrategies and techniques.

Section2:Taxoptimisation

Introductiontotaxoptimisation

Asmallcaution

Tax is a complicated subject. Always seek professional advicebefore embarking on any tax planning strategy.

Taxoverview

All businesses are subject to a number of taxes, and a betterunderstanding of these taxes will lead to a better ability to plan forthem. Here’s an overview of the main areas:

IncomeTax

The salaried income you and your employees receive is subject toIncome Tax, which is deducted from you gross salary paymentduring payroll. Currently (for the 2015/16 tax year) most individualscan earn £10,600 per year free of Income Tax; after this, IncomeTax is deducted at a rate of 20%, 40% or 45%, depending on yourearnings.

NationalInsurance

Salaried income is also subject to National Insurance payments,which are paid by both the employee (deducted from their grosssalary) and the employer (an additional expense on top of thesalary). National Insurance is a little more complicated to calculatethan Income Tax, however in most cases the employee must pay12% and the employer must pay 13.8% of the employee’s annualearnings above £8,060.

QualifyingforNationalInsurancebenefits

Aside from partly funding the NHS, National Insurance is used topay for a number of benefits, including: jobseeker’s allowance;incapacity benefit; bereavement benefits; maternity paymentsand State Pensions. If your earnings are below £5,824 per yearyou may not qualify for all of these benefits.

VAT(valueaddedtax)

If your company turns over £81,000 or more per year you mustregister for VAT and make the appropriate charges to your clients.VAT is charged on top of your net invoice amount – for example ifyou charge a client for 10 days’ work at £200 per day your invoicewill total £2,400 including VAT (at 20%).

As well as charging VAT to your clients, you can also claim back theVAT from purchases your company makes – you only pay thedifference between the VAT you charge to your clients and the VATyou pay on purchases. Many contractors, freelancers and smallservice-based businesses will choose to adopt HMRC’s flat rateVAT scheme. In this instance you again charge VAT on your netinvoice amount at the normal VAT rate but just pay a fixedpercentage of your gross income as VAT over to HMRC, dependingon the flat rate percentage relevant to your business.

CorporationTax

Corporation Tax is payable annually and based on the profit thatyour company makes during your financial year. Your profit is yourcompany’s income minus its expenditure (including salaries paid toemployees but excluding dividends paid).

The current Corporation Tax rate for small companies is 20%. TheCorporation Tax needs to be taken into account to determine whatprofits remain available to pay to the shareholders; this remainingamount can be issued to the shareholders as dividends. If your

company has made £20,000 profit, up to £16,000 can be withdrawnas dividend payments.

Tax-efficientwithdrawals

During the day-to-day running of your business, you’ll need todecide how best to manage your money in order to reduce your taxburden. The following list details how money can be withdrawn fromyour business, listing the methods from the most tax-efficient to theleast:

Legitimatebusinessexpenses – expenses that are incurredduring the running of your business with no personal elementcan be repaid without being subject to tax. Commonexpenses include mileage to and from a client’s office,sustenance whilst working away from home, hotel stays andoffice consumables.Payrolluptoyourpersonalallowance (commonly £10,600) –by making use of your personal allowance your income willnot be subject to Income Tax. You will, however, payNational Insurance on income above £8,060.Dividendpayments – you can withdraw profit from yourcompany in the form of dividends. These payments can bemade after deducting Corporation Tax from your company’sprofit. Corporation Tax is currently 20%. You will, howeverneed to personally pay higher rate tax on any dividends overthe higher rate tax threshold.Payrollaboveyourpersonalallowance – once you earn anannual salary above your personal allowance figure, you willbe subject to Income Tax at a rate that falls between 20% to45%, plus employees’ and employers’ National Insurance.

Personalexpenses/benefitsinkind

It’s also possible to pay personal benefits to employees – such asproviding assets for personal use, for example health insurance or

gym memberships. However, the taxation rules around thesebenefits can be quite complicated and we strongly suggest youhave an in-depth discussion with your accountant beforeconsidering them.

Taxsavingtips

Maximiselegitimateexpenses

As we’ve already discussed, expenses can be offset againstcompany profits, thus reducing Corporation Tax. Therefore youshould ensure you’re recording and claiming all legitimate businessexpenses. In particular, don’t forget the following:

Mileage – you can claim for the mileage incurred whentravelling to and from a client’s office, and with tax-free ratesup to 45p per mile this soon adds up. Remember to includeyour car parking and congestion charges.

Carrypassengers – you can claim 5p per passenger perbusiness mile for carrying fellow employees in a car or van onjourneys that are also work journeys for them. Note that thepayment can only be made if the journey is specifically forcarrying passengers.

Sustenance – you can claim for meals and refreshmentspurchased whilst working with a client.

Accommodation – if you’re working away from home youcan claim for accommodation costs, such as hotels or B&Bs.

Computerhardwareandsoftware – you can claim for ITequipment so long as it is purchased solely for business use.

Businessphones/broadband – you can claim for mobilephone and broadband costs when they are used for businesspurposes.

Eyetests – if you are required to use a computer for workyou may be able to claim back the costs of an eye test.

Professionalmembershipsandsubscriptions – HMRCpublishes a list of recognised professional bodies for whichyou can claim back the membership fee

Payyourselfasmallsalaryandtakeprofitsasdividends

By maintaining a small salary you can reduce your Income Tax andNational Insurance bill by using your tax-free personal allowance.By paying more out as dividends you will be paying Corporation Tax(around 20%) which ultimately is lower than the Income Tax andNational Insurance rate you would pay if you had a larger salary.

It is not uncommon for a spouse to have shares and hence receivedividends when they are paid. The advantage of this approach is itmay allow use of any unused personal tax allowances. This iscovered in more detail in chapter 13.

Maximisecompanypensioncontributions

One of the easiest methods to save tax is to put money into apension scheme. This will either reduce the Corporation Tax paid onthe company profits by making employer contributions or you’llreceive tax relief on your personal contributions, depending on theselected pension scheme.

Should you need to set up a pension or review your currentarrangements, we recommend you discuss this with anindependent financial adviser.

More information on pensions can be found in our guide to savingsand pensions.

OptforcontractswhereyoucanoperateoutsideofIR35legislation.

Understanding and working outside IR35 is a powerful way ofkeeping your tax bill to a minimum. By understanding IR35 andseeking contracts that comply you will inevitably reduce your taxburden.

Structureyourremunerationtaxefficiently

It’s a sensible idea to put money aside within your business for aperiod when you may decide to have a break or are waiting for yournext contract.

If you were to withdraw all your earnings it could force you into ahigher rate tax bracket, so why not reduce your earnings and ensuregreater peace of mind by keeping as much profit as possible withinyour business?

ReviewyourVATmethod

It’s important to occasionally review the VAT method used by yourcompany; this will both help you to stay on top of VAT rate changesand keep your tax bill as low as possible. For example, consider ifyou would be better moving away from flat rate VAT to the standardscheme or vice versa.

Nextsteps

Review each of the points in this chapter and consider if you aredoing enough to minimise your tax bill. In the next chapter weprovide five advanced tax-saving tips before we look at more in-depth tax optimisation strategies in this section.

Fiveadvancedtax-savingtipsIf you are a seasoned contractor, consultant or small businessowner you’re probably well-practised in the usual tax efficienciesaround salary and dividend splits and company expenses, buthere’s a quick round up of the top 5 more unusual tips for savingtax that you may not have considered.

1.Taxbreaksforgreencars

If you have a company car, the tax and National Insurancecontributions are based on the CO2 emissions and the list price ofthe car plus accessories. Owning a green company vehicle forcompany use only can save you hundreds of pounds a year onvehicle excise duty and benefit in kind deductions. Standardcompany car benefit in kind deductions start at 11% forconventional petrol and 14% for diesel vehicles. The maximum levelis 37% for the biggest CO2 emitters.

The greener the car in terms of emissions, the more you can save.Owning a hybrid can decrease your benefit in kind rate by at least5%. Low and ultra-low carbon emissions vehicles (such as plug-inhybrids and all electric vehicles) attract the lowest benefit in kindrates at just 5% as of April 2015.

Benefits in kind are any personal benefits received from yourcompany that are taxable such as a company car, loan, gymmembership etc. They must be declared to HMRC using a formknown as a P11D and as a result additional Income Tax will be dueplus your company will have to pay Class 1A National Insurance onthe value of the benefits.

2.Tax-efficiententertaining

Business entertainment isn’t tax deductible, but there are ways toclaim VAT back on certain expenses that would otherwise be seenas entertainment.

Quid pro quo – put simply you can provide proper and sufficientquid pro quo (something of equivalent value given in return forcash/goods or services) to suppliers, customers or potentialcustomers. The key to ensuring you comply with this interpretationis that it is equivalent value.

An example of this would be refreshments and nibbles on a tradestand for feedback questionnaires. A full lunch and travel expenseswould be considered for more input – say, a full day of producttesting or a workshop. If it is part of a contractual agreement thenthe hospitality provided needs to be an explicit part of a contractualagreement. In this case it is not classed as business entertainmentas there is a compulsion to provide a service or reciprocate.

An example of this is if you have a co-supplier and you agree toprovide the accommodation and subsistence for their workerswhilst they work onsite with you with the contractual understandingthat they provide the same (the equivalent value) for you. For HMRCguidance click here.

3.Director’stax-freeloans

The ability for directors to take out tax-free loans from theircompany for a specified period of time has been in place for sometime. There are some important rules to consider; one is the amountyou can borrow as a director without attracting benefit in kinddeductions, the other is the length of time you can borrow themoney without your company being taxed on the amount borrowed.

You can now borrow up to £10,000 without attracting benefit in kinddeductions. You must repay the company loan within 9 months ofthe company financial year end to avoid the 25% company tax bill.In addition to repaying the loan you need to ensure that there is agap of at least 30 days before you take another loan from thecompany, or HMRC consider the arrangement as tax avoidance.

Loans over £15,000 that are repaid and then taken out after a short-term loan facility is utilised attract the 25% charge under theavoidance rules too.

In short, you can borrow £10,000 completely tax free, providing yourepay the loan to the company within 9 months of its accountingyear end, and wait 30 days before re-applying for a loan from thecompany. Arrange a short-term overdraft or loan facility to cover thethirty days (or borrow from a relative) and you can borrow £10,000from your company almost indefinitely.

See also the next chapter for more details.

4.Tax-freeincomeprotectioninsurance

For more detailed information see the chapter “Considering arelevant life policy”. Income protection insurance is valuableprotection should the worst happen and you are unable to work fora while due to illness, for example. But premiums can be expensive,up to thousands of pounds in some instances.

You can set up corporate income protection for yourself or multipleemployees; this means that you pay the insurance premium out ofcompany funds (not your taxed income).

HMRC allows you as a company to choose the way in which youare taxed for the income protection cost; declare it as benefit andkind and pay tax on the premium or choose not to declare it asbenefit in kind and pay tax on any associated pay-outs in the eventof a claim. To make the most of tax savings:

Opt not to declare the premium as benefits in kind for anyclaim-free years.

Opt to declare the premium as benefits in kind for anyclaimants on the policy for the year of claim.

This way, you maximise tax efficiencies by only paying tax in theevent of a claim being made, and it is only on the premium ratherthan the more substantial pay-out.

5.Oneforthefuture–tax-freechildcarechanges

HMRC has announced that a new childcare allowance scheme isdue to be launched in autumn 2015. Under the new scheme parentsearning between £50 per week and £150,000 per year will beeligible. It’s thought that HMRC will notify eligible parents so theycan sign up online.

The scheme will consist of an online account that the parent canpay into, that HMRC tops up by 20% to a maximum value of £2,000per year, per child, for a maximum of 5 children up to the age of 11.The childcare provider is then paid via the online account for anyqualifying childcare.

If you qualify for the scheme, it will mean that for every 80p youcontribute, HMRC will top this up to £1. That’s a saving of £400 peryear, per child.

Nextsteps

This chapter provided a snapshot of five less well known taxoptimisation tips. We’ll cover the majority in more detail in thissection. In the next chapter we look at how you can borrow money,tax free, using a director’s loan account.

Director’sloanaccount–borrowingmoney

Asmallcaution

Care must be taken when borrowing money from your company.Please ensure that you fully understand the tax and NationalInsurance implications before taking any sort of loan from yourcompany.

A director’s loan account is an accounting record of money beingborrowed from or loaned to your company. You can borrow up to£10,000 from your company tax-free by adhering to the rulesgoverning director’s loans set out by HMRC.

Taximplicationsofdirector’sloans

For Income Tax purposes HMRC class a director’s loan asoverdrawn if you borrow money from your company and this, at anypoint in time, exceeds £10,000. If your loan account does becomeoverdrawn by £10,000 it means you will have received a benefit inkind.

An added complication with a director’s loan is if there is anybalance outstanding on the loan when your year-end accounts andCorporation Tax return are prepared it must be shown on yourCorporation Tax return. Your company must then pay 25% of theloan value in additional Corporation Tax if there is still a balanceoutstanding 9 months after the year end.

For example, if you have a loan of £4,000 outstanding when yourCorporation Tax return is prepared you will need to pay HMRC

£1,000 in additional Corporation Tax. Once the loan is repaid theCorporation Tax on the loan amount can be reclaimed however thiscan’t be done until nine months after the end of the accountingperiod in which the loan was paid off.

We recommend your accounts and Corporation Tax returns are filedas soon as possible after your company financial year end.However, as the filing deadline is 9 months after your companyfinancial year end it is possible to delay filing your return. This wouldallow you additional time to repay the loan, therefore avoiding theadditional Corporation Tax.

Our advice is if you need a loan try to keep it below £10,000 toavoid additional tax and National Insurance and, if possible, repaythe loan in full before the end of your company financial year.

Using a director’s loan account ensures that no tax is paid on themoney when it enters and leaves your company.

Pointstoremember

If you borrow money from your company’s bank account and it isnot a salary or a dividend, then it’s a loan from the company to you.This is recorded on your director’s loan account and it is said to beoverdrawn. The loan can then be repaid by paying the money backinto the company bank account or by the company crediting theloan account using a salary or dividend payment to clear the loan.When crediting the loan account a dividend or salary is recordedbut not paid out – it is used to clear or reduce the balance of theloan account.

If at any point the outstanding value of the loan to the directorexceeds £10,000 in the tax year, the company will need to payClass 1A National Insurance and the director will need to payadditional tax. This is declared on a P11D.

Depending on how your loan account is managed, it will determine

what you need to tell HMRC and whether you need to payCorporation Tax on the loan amount.

If you clear the entire balance of your director’s loan by the last dayof your company’s financial year:

You do not need to pay Corporation Tax on the loan.You don’t need to tell HMRC about the loan on yourCorporation Tax return.

If your director’s loan account is still overdrawn after the end of yourfinancial year but it is repaid in full within nine months of it:

Your company does not pay tax on the loan.Details of the loan must be included on your Corporation Taxreturn.

If your director’s loan account is not paid off in full within ninemonths after the end of your financial year end:

You must pay Corporation Tax on the loan which currently is25% of the loan value, e.g. if your director’s loan account isoverdrawn by £10,000 you need to pay £2,500 in additionalCorporation Tax.

You must pay HMRC interest which is non-refundable.

You must include details of the loan in your Corporation Taxreturn.

If you pay the additional Corporation Tax of 25% of the loan value,you can reclaim this from HMRC once the loan has been repaid toyour company. However, the claim will be made nine months afterthe end of the financial year in which the loan was paid off thereforeyou may be in for a long wait!

Nextsteps

The next chapter provides information on how to choose a tax-efficient salary when structuring your personal income stream.

Howtochooseatax-efficientsalaryThis chapter is aimed at giving you the facts about how differentsalary levels will affect your tax and National Insurance obligations.We want to give you the information so that you can decide whatsalary is best for your circumstances. Armed with the tax thresholdfigures, you can make an informed decision on the salary level thatmeets your needs.

Setting your salary for the current tax year can be daunting, but byexploring the options, you can make the right decision for yourneeds. It’s worth noting that there is no minimum wage requirementif you are a director of a company (unless you have a contract ofemployment with the company). Typically, business owners takeone of four approaches:

1. Maximising tax and NIC efficiencies; or2. Meeting the Income Tax threshold; or3. Paying themselves a living wage based on their specific

needs; or4. Taking a higher salary to satisfy visas or lending

requirements.

It’s important to take all your income streams into account whencalculating your tax and NIC liabilities; this can include salary orincome from other jobs, share and savings income, pension incomeand any other source of income. If you have multiple incomestreams, you should contact an IFA for advice.

AreyouinsideIR35?

You can only set a salary and pay dividends when you operate

outside IR35; if you operate within IR35, all earnings must betaken via a salary.

Decidingwhat’srightforyou

What you need to consider:

1. What Income Tax and National Insurance contributionefficiencies do you want to achieve?

2. Do you want to ensure that you retain your right to a state-earned pension and other benefit entitlements?

3. What level of contribution do you want to set for your pensionthis year?

4. Do you need to demonstrate a certain salary level for anyreason e.g. income for borrowing purposes?

5. Do you have other sources of income?

IncomeTaxandNationalInsuranceefficiencies

The tax-free personal allowance for 2015/16 is £10,600; thereforethe first £10,600 you earn will be free of Income Tax.

IncomeTaxrates

Basedonanemployeewithapersonalallowanceof£10,600.

Taxrates Incomeperyear Rate(salaries)

Rate(dividends)

Taxfree £0 – £10,600 0% 0%

Basicrate £10,601 –£42,385

20% 10%

Higherrate £42,386 –£150,000*

40% 32.5%

Additionalrate

Over £150,000* 45% 37.5%

*Onceyouearnabove£100,000taxationbecomesalittlemorecomplicated.Yourpersonaltax-freeallowanceisgraduallyremoved.Pleaseuseourtaxcalculatorforanexacttaxcomputation.

NationalInsurancethresholds

If you earn above the amounts listed below, then National Insurancecontributions are payable, however you may benefit from the £2,000National Insurance Allowance.

NIpayments Foremployees Foremployers

Weeklypay £155 £156

Annualpay £8,060 £8,112

The maximum salary you can take without paying Income Tax orNational Insurance contributions is £8,060

StatePensionandbenefitentitlementretention

In order for this year to count towards your qualification for theState Pension and other benefits, you need to earn a minimumsalary of £5,824. So to retain your State Pension entitlement butmaximise NIC efficiency, you should ensure your total annual salaryincome is £5,824 - £8,060.

Pensioncontributionconsiderations

It’s important to ensure that you plan for your retirement. In settingyour salary level, you also set the maximum amount you cancontribute to a personal pension.

From April 2015, the annual maximum of £40,000 has been set fortax-free pension contributions and (as long as you were in aregistered pension scheme during the tax year) if you don’t use the

full allowance in the year, you can carry it forward for the next three.This is, however, limited by your Net Relevant Earnings (NRE).Dividends don’t count towards the pension contribution figure; youcan only contribute an amount equal to the salary you receive forthe year if you earn less than £40,000. If you pay more in, it will betaxed.

If you want to supplement these payments, you may be able tomake employer contributions for director-shareholders to top upyour pension. You should consult an IFA to ensure your pensioncontributions meet your needs.

Demonstratingincomelevels

You may want to consider taking a higher salary in order to satisfyvisa or lending requirements where a minimum salary level isrequired.

The majority of lenders are now more flexible in terms of how youdemonstrate your income. More lenders now consider dividendincome in addition to traditional salary income when calculatingyour total income for borrowing, so it is always worth exploring theopportunities as this may mean you can maximise tax efficienciesby reducing your salary.

Takingallincomestreamsintoaccount

When you are calculating your tax and National Insurancecontribution liabilities, it is important to ensure that you consider allyour income streams. This can include: salary or income from otherjobs, share and savings income, pension income and any othersource of income.

Summary–allthekeyfiguresinoneplace

Below you’ll see a handy infographic that summarises the keypoints to consider when setting your salary for 2015/16:

Salary recommendations for 2015/16 tax year

Nextsteps

By using a blend of tax-optimised salary and dividends you canminimise your personal and corporate tax liabilities. The nextchapter details when and how to pay yourself a dividend.

PayyourselfdividendsAs an owner of a limited company, often the most tax-efficient wayof paying yourself is through a mix of a small salary and dividends.The small salary is usually set to minimise Income Tax and NationalInsurance as discussed in the previous chapter. This chapterprovides information on how to utilise dividends within yourpersonal income stream.

Dividend – is a distribution of profits by a company to itsshareholders. Dividend payments must be taken after CorporationTax on the company profits is accounted for.

By taking a small salary, you ensure that your National Insurancecontributions are up to date and you are tax efficient by taking therest of the profits you make as dividends.

Whydividendsaretaxefficient

Dividends attract 20% Corporation Tax (tax paid by the company),but no National Insurance and less Income Tax (tax paid personally)than a standard salary. So after the company pays 20%Corporation Tax, typically in the 2015/16, a basic rate tax payer(with a personal taxable income* of £31,785 or less) won’t payIncome Tax on dividends; a higher rate tax payer (with a personalincome* of more than £31,785) will pay around 25% Income Tax onthe dividends received.

* Income=Salary+Grossdividends+Anyotherincome–Personalallowance

The tax band applies to your income after your tax allowances andany reliefs are taken into account, so you need to allow for yourpersonal allowance as in the equation above.

As gross dividend income is added to your other taxable income

and taxed last, you pay tax on dividend income based on yourhighest Income Tax band.

The tax to pay on income (including the dividends you pay yourself)is calculated at the end of the tax year via the self-assessment taxreturn and paid by the individual personally. If you are a higher ratetax payer, that means you will need to make provision for theIncome Tax on the dividends at the end of the year calculatedthrough self-assessment. You can keep track of this throughout theyear using our Tax calculator.

The benefits of paying yourself through a mixture of salary anddividends

Whenyoucanpaydividends

You can distribute dividends any time and at any frequencythroughout the year, providing there is enough profit in yourcompany (and available cash) to do so. From an HMRC perspective,you need to ensure that all the dividend payments are covered bythe company profits net of Corporation Tax. This means that youcan withdraw dividends at any time as long as there’s enough profitavailable in your company. So what does this look like from abusiness owner’s point of view?

Income (minus the VAT if you are VAT registered) from contractsoutside of IR35**Less Expenditure (salary, NIC, all business expenses)= TaxableprofitLess Corporation Tax @20%= Maximumdividendavailablefordistributiontoshareholders.

** AnoteonIR35 - Dividends cannot be taken on contracts fallingwithin IR35. You must take all the income earned from these assalary. For more information on IR35, look at our IR35 guide. Anyincome from contracts falling inside IR35 must be treatedseparately.

Most contractors and small business owners pay dividendsfrequently throughout the year. All you need to do is ensure that thedividends you distribute are covered by the profits net of expectedCorporation Tax and that you leave enough cash within thebusiness as operating capital to meet your future outgoings.

Howyoupaydividends

Every limited company has to ensure that they document and paydividends appropriately. Here are the typical steps that are requiredbefore a dividend can be paid.

1. Calculate the company profit available.2. Calculate the cash available and any requirements for

operating capital.3. Hold a directors’ meeting and produce minutes documenting

the dividend payment decision.4. Print and retain the minutes.5. Produce a dividend voucher detailing the dividend payment.6. Pay the dividend.

Nextsteps

By structuring your personal income using a blend of salary anddividends, you can look to optimise your household income throughappointing shareholders and employing family members. Weexplain this in the following chapters.

AppointingshareholderstomaximisetaxefficienciesAs a part of the company formation process, you need to decidewho will be a shareholder in your limited company. If you choose toappoint family members as shareholders, it enables you todistribute company profits to them.

Whatareshares?

Shares are used to apportion ownership of the company.Ownership of shares in a company usually affords the shareholdervoting rights and therefore influence over the running of thecompany. Shares are also used in the distribution of profit from thecompany; shareholders are paid dividends based on the number ofshares they hold. It is a key part of ensuring your business is as tax-efficient as possible so it is important to make sure that thedistribution of company shares works for you.

Whatisashareholder?

Simply put, a shareholder is someone who owns shares in acompany. The majority of contractors and freelancers are the soleshareholders within the business, but there is a fair proportion thatutilise shares to ‘pay’ other individuals linked with the company in atax-efficient way. This is a technique used to share dividend incomewith a spouse, for example, and can maximise unused personal taxallowances.

Whocanbeashareholder?

Shareholders should be a spouse, a civil partner, or anyone who

actively works in the business. Shareholders usually have votingrights and therefore some control over how the business is run, aswell as having rights to a share of the profits (distributed asdividends). The proportion of shares an individual owns determinestheir proportion of the profits.

Distributingshares

You can hold the majority of the shares and then distribute sharesto other individuals; this then enables you to distribute dividends toall shareholders in accordance with their share allocation.

Things to note when allocating shares:

1. Ordinary shares can be allocated to spouses - they qualify forthe spouse’s exemption under Section 624.

2. Dividends paid to the spouse must be income for them tospend as they wish – you can’t ‘reroute’ the payment back toyourself as the main shareholder.

3. Keep a solid audit trail: document all share transfers anddividend payments through transfer forms and the requiredboard minutes and vouchers when dividends are paid. This iscrucial to ensure that, should HMRC ask, a full record can beprovided.

4. We would not recommend the use of dividend waivers,therefore you should approach these with extreme caution.Waivers allow a shareholder to waive their right to a dividendpayment. Some shareholders use this to enable the dividendamount to remain in the business (investment), but waiverscan also be seen as tax avoidance when the waiver allowsprofits to be diverted to lower-tax attracting shareholders.

Nextsteps

Tax efficiencies are only applicable for additional shareholders iftheir personal income is under the lower tax threshold. You can alsoconsider employing family members to maximise household tax

efficiencies. This is covered in the next chapter.

EmployingyourpartnerorfamilymembersinyourcompanyIt is common for contractors and consultants to employ theirspouse or other family members in their business. It not onlyprovides the opportunity to maximise tax efficiencies within thehousehold but their role is often pivotal in the smooth running of thebusiness. Employing a family member to ensure the admin or corebusiness services are taken care of frees you up to maximise thecompany income.

Benefitsofemployingaspouse

Paying a salary can maximise household tax efficiencies by utilisingtheir income thresholds for tax liabilities.

Thingstoconsider

Paying a family member is like any other employee and needs to betreated as such.

The salary must be commensurate with their hours and therole they occupy within the company.

Your IR35 status affects how much you can pay them. If thecontract is within IR35 their salary is not allowable as adeduction and therefore you would be taxed again on theirsalary. If you operate outside IR35 their entire salary is a tax-deductible expense, meaning it reduces your CorporationTax bill.

Nextsteps

Before employing a family member, do your research to ensure youare paying them the going rate for the role.

Keep records of all salary payments and the role descriptions for atleast six years, as this is how far back HMRC can investigate.

This chapter covered looking after your family income. In the nextchapter we look at looking after your family in a tax-efficient way.

Tax-efficientchildcareFor the majority of contractors and consultants, running a smalllimited company means that it is often not cost effective to set up achildcare voucher scheme; however you can pay for childcarethrough the company by contractual agreement with a commercialnursery or childminder. This way you can increase your personal taxefficiencies.

Requirements

The company must be invoiced directly by a nursery or childminderand the payment will be free of tax and NICs for you as anemployee as long as the following criteria are met. The exemptiondoes not apply if the company reimburses the cost or settles the billon your behalf.

The payment is up to the relevant exempt amount peremployee (see below);The scheme is available to all employees;The child lives with the employee and the employee hasparental responsibility for the child;The childcare provider is registered or approved; andAn estimate of the employee’s relevant earnings has beenmade by carrying out a basic earnings assessment and keptin case it is required by HMRC. You must do this annually.

Relevant earnings are calculated by taking your salary plus benefitsless your personal allowance.

For the 2015/16 tax year, as long as this does not exceed £31,785,tax relief is available on £55 per week (£243 per month). For relevantearnings between £31,3786 and £150,000 this is reduced to £28 perweek (£124 per month). Any amounts paid above these are a benefit

in kind and need to be reported on a P11D form.

Nextsteps

Obtain and file a copy of your childcare provider’s registrationdetails i.e. their professional body and registration number.

Ensure they provide you with correct invoices containing thefollowing:

Their name and addressRegistered childcare provider number or equivalentDate of invoiceInvoiced to your company (not you personally)Service description and amount.

You need to ensure that your company pays them directly from yourbusiness account and record the cost of childcare as a businessexpense.

This chapter has outlined looking after your family in a tax-efficientway; the following chapter details how to plan for your retirement.

Tax-efficientpensioncontributionsPaying into a pension fund not only supports your incomerequirements for retirement, but it is also an effective way ofminimising both your corporate and personal tax liabilities.

Companycontributions

The payment of employer pension contributions can be paid directlyfrom the company bank account into an appropriate pension fund(providing your pension fund accepts company contributions).

There isn’t a limit on company contributions but they must bereasonable as part of your remuneration package as a whole.Company contributions reduce your Corporation Tax liabilities.

Personalcontributions

You can pay personal contributions from your post-tax income, upto 100% of your earnings in a year. There is an overall limit of£40,000 and you can carry forward three years’ worth of entitlementlimit.

Paying personal contributions is an effective way of reducing yourincome and preserving your personal allowance.

Dividends do not count towards earnings, so the maximumcontribution is based on your salary only.

Personal contributions reduce your personal tax liabilities.

Nextsteps

Pension advice is regulated and you should seek advice from a

regulated independent financial adviser before entering into apension scheme. This will ensure that you select the right pensionscheme for you and that the money invested is at the correct levelto meet the regulatory requirements and your retirement fund target.

In the next chapter we look at protecting your lifestyle and futureincome through insurance.

ConsideringarelevantlifepolicyA few years ago, it was impossible to find levels of cover to rival‘death in service’ life insurance cover if you were a small limitedcompany. Now, a Relevant Life Policy (RLP) can provide the level ofcover for directors and shareholders of small limited companieswith the tax benefits that ‘death in service’ cover attracts.

A ‘Relevant Life Policy’ is a tax-efficient life policy designed forsmall businesses. Standard life insurance policies are paid for byyou as an individual, after tax. The beauty of an RLP is that it is paidfor through your limited company, offsetting Corporation Tax and itdoesn’t attract personal tax either.

Thecover

The RLP is designed for businesses that don’t have enoughemployees to warrant a group life scheme; you can set up an RLPfor just yourself as the director of your limited company.

You can normally insure up to 20 times your annual income: yoursalary, dividends and benefits in kind. Some insurance companiescan cover up to as much as £10m.

The premiums and benefits don’t count towards your annual orlifetime pension allowance which is important if you have a largepension fund or you want to maximise your contributions into yourpension.

Restrictionstobeawareof

When looking at an RLP to provide life cover, there are somerestrictions to consider:

The cover must be paid in a single lump sum before the ageof 75;Only death benefits can be provided;Benefits must be paid through a discretionary trust (thiskeeps the policy payments in trust for the company); andBeneficiaries are normally restricted to family members anddependants.

Whyisadiscretionarytrustused?

There are legislative restrictions on whom the benefits can be paidto. The use of the trust is the most practical way to ensure therequirements are met.

Having benefits paid through the trust ensures they can’t betaxed as part of the trading income, nor do they form part ofthe company’s assets.

The trust is discretionary, allowing trustees to be flexible inwhom they pay benefits to. However the person covered canadvise the trustees of their intentions by completing anomination form. Although this is not legally binding, it helpsto guide the trustees. The trustees are usually directors of thecompany.

Using a trust ensures that in most circumstances the benefitspaid are free of both Income Tax and Inheritance Tax.

Thetax-savingbenefits

RLPs are usually classed as an allowable business expense, so allpremium and benefit payments qualify for Corporation Tax relief,Income Tax relief and NI relief. In real terms this means that the costof premiums can be reduced by up to 49% for a higher rate taxpayer and by 40% for a basic rate tax payer. Here’s an example ofthe savings:

Costs Individual Relevant

lifepolicy lifepolicy

Premium £100 permonth

£100 permonth

Employee National Insurancecontribution (assuming 2%)

£3.45 None

Income Tax (assuming 40%) £68.97 None

Grossearningsneeded £172.42 £100

Employer National Insurancecontribution (assuming 13.8%)

£23.79 None

Totalgrosscost £196.21 None

Less Corporation Tax (assuming20%)

(£39.24) (£20)

Taxadjustedtotalcost £156.97 £80

That means you could be saving £960.00 per year through taxefficiencies with an RLP.

Nextsteps

Contact a qualified and regulated financial adviser or insurancebroker to discuss the level of cover you need. Ensure that youpurchase the policy through your company and record thetransaction accordingly.

This is our final chapter in section two, and the final chapter in thisbook looks at actions to take at the end of the tax year to ensureyou have saved all you can on your company’s and your personaltax bill.

Section3:Yourcompany’syearendchecklist

Yourchecklistofactionstotakeattheendofyourcompany’sfinancialyearBefore your company year end arrives it’s important to take theopportunity to minimise your tax bill before it’s too late. Taking afew minutes to read this guide could save you hundreds in tax.

If you’ve had a successful year and your company has made aprofit, Corporation Tax will become payable. There may still,however, be opportunities before your year end arrives to reduceyour Corporation Tax bill.

The aim of this checklist is to provide you with tips, advice andchecks to complete in conjunction with the more detailedinformation in the previous chapters.

It’s crucial that you take action before your year end for it to beincluded in your accounts and Corporation Tax calculations.

1.Reviewyourcompanyexpenditure

The simple fact is that the higher your spending the lower yourprofit, and the less tax you need to pay. If you have any plannedexpenses or purchases then just before the end of your year is agreat time to maximise your company’s outgoings.

Ensuring all expenses are claimed will save at least 20% in tax relieffor those that are wholly, exclusively and necessarily for thepurpose of business.

If you’ve ensured that you are claiming for all your businessexpenses, as detailed in chapter 8, it’s also worth thinking aboutensuring you spend on, and claim for these now before the year

end:

Doublecheckyou’veaccountedforallyourpersonalexpenditure on behalf of the company – check through allthose old receipts to make sure every penny is claimedback.Staffevents – If you didn’t get time to have a Christmasparty, why not have a late celebration? Just make sure thetotal spend per head is under £150 including VAT for theyear.Stockuponofficesupplies – for example printercartridges, paper, stationery or other general officesupplies.Purchaseassetsforcompanyuse – including ITequipment, software and office equipment.Subscriptionsandannualfees – it’s a great time to joinan HMRC recognised professional body and make annualpayments for online necessities such as domain namesand hosting, file storage or project management software.Mobileorsmartphones – businesses benefit from theconnected world and a smart phone is the perfect tool. Ifyou need and use a mobile phone for business and don’tyet have the contract in your business’ name, considertransferring it. For it to be an allowable expense thecontract must be in the name of the business and paid fordirectly by the business. Don’t worry, a small amount ofpersonal use is allowable.Otheritems – it’s also a good time to get any equipmentrepaired, updated or serviced and to ensure yourinsurances are up to date.

2.Repaydirectors’loans

If any of your directors have received a loan from your company

then it’s important to repay the loan back to your company as soonas you can. If loans are not repaid you may need to pay CorporationTax of up to 25% on the balance of the loan.

3.Reviewsalariesandbonuses

It’s a good time to pay yourself or your partner for any legitimatework that’s been done throughout the year. For example, if yourspouse helps with company admin or project management, youmay be able to pay them a salary or bonus which will reduce yourCorporation Tax liability. A person needs to be on the companypayroll in order to be paid a salary. If they’re not already anemployee you’ll need to act now if you wish to pay a salary. A keytax advantage of running a business is the opportunity to keepNational Insurance costs low. Typically this is achieved by ensuringthe director’s salary is set to an optimum level, for the 2015/16 taxyear around £8,000 per year. Remember, this is only an option ifyour contracts are outside IR35.

4.Checkyourinsurancecover

It’s likely that you already have Professional Indemnity insurance tomeet the contractual obligations but you could consider additionalbusiness cover to protect against the worst. In recent years newproducts have become available that are compatible with smallbusinesses, of which some can offer tax relief.

5.Investinortopupacompanypension

The end of your company’s year is a good time to take stock of yourretirement planning and to top up your pension. If you plan to topup your pension, please ensure any payments are made andreceived by the pension company before your year end.

6.Extractprofitsasdividends

Once you’ve maximised your outgoings and updated your records,you can finalise your company’s dividends for the year. You maydecide to pay additional dividends if you and/or your businesspartner(s) don’t fall into the higher rate tax bracket.

Now is the perfect time to draw dividends in order to takeadvantage of the tax allowances: the majority of employees candraw up to £41,865 per year via salaries and dividends beforepaying higher rate tax. If you want to take advantage of yourallowances simply draw a dividend before 5 April.

Aquickrecaponthe2015/16IncomeTaxandNationalInsurancerates

The following rates and allowances apply to the tax year starting 6thApril 2015 to 5th April 2016 Income Tax personal allowance

For the majority of employees the tax-free personal allowance for2015/16 is. £10,600. This means that the first £10,600 you earn in ayear will be free of Income Tax.

This will be reflected in your tax code: if your tax code for 2015/16is 1060L then you will be entitled to this allowance.

Income Tax rates

Incomeperyear

Rate(salaries) Rate(dividends)

Basic rate £0 – £31,785 20% 10%

Higher rate £31,786 –£150,000

40% 32.5%

Additional rate Above £150,000 45% 37.5%

IncomeTaxexample

If an employee earns a salary of £56,000 they will pay tax as

follows:

Personal allowance – the first £10,600 of their salary willbe free of taxBasic rate – they will pay 20% tax on £31,785 of theirsalary, which is £6,357Higher rate – they will pay 40% tax on the remaining£13,615 of their salary, which is £5,446In total this employee will pay £11,803 in Income Tax

NationalInsurancerates

There are two different National Insurance contributions that mustbe paid: one is paid by the employee and is deducted from theirgross salary, in a similar way to Income Tax; the second payment ismade by the employer and is an outgoing for the employer, inaddition to gross salaries.

PaidbyEmployees PaidbyEmployers

Incomeperyear Rate Incomeperyear Rate

Below £8,061 0% Below £8,113 0%

£8,061 – £42,385 12% Above £8,113 13.8%

Above £42,385 2%

NationalInsuranceandstatebenefits

Employees must earn over £5,824 per year in order to retain accessto certain state benefits, such as State Pensions.

Nextsteps

It is important to review your tax liabilities regularly and perform afull review each year to ensure you take advantage of any revised

thresholds and tax allowances given by HMRC.

When looking to improve your tax liabilities it is important to investin the advice of a qualified and regulated independent financialadviser who specialises in tax affairs.

We hope you found this guide informative and that it has providedyou with some ideas to discuss with your tax adviser. This guide isfor information only and does not constitute or replace tax advicefrom a qualified professional.

Visit our comprehensive Tax Calculator and plan all your taxes andearnings tax-efficiently. Calculate your income taxes, salary anddividends, student loan and pensions contributions, and muchmore. Our Tax Calculator goes further than showing how much taxyou can save - you can compare calculations and download yourown extensive PDF tax report based on those calculations, allowingyou to take in all the details in your own time, instantly, andcompletely free.